The Employee Retention Tax Credit has been a welcome lifeline to many struggling businesses and those most significantly impacted by the economic uncertainty around the COVID-19 pandemic.
The ERTC, similar to the PPP loan, has helped support small businesses through a refundable credit associated with employee retention. The original ERTC was passed as part of the CARES Act in March 2020, subsequently expanded and extended in December 2020, and expanded again in March 2021. Presently, the Employee Retention Credit provides a 70% credit on the first $10,000 of wages for employees of qualifying businesses for each quarter the business meets the criterion in 2021, and 50% of up to $10,000 in qualifying wages per employee for 2020.
Companies can go back to 2020 to claim refunds related to the credits by amending 2020 payroll tax returns. There are essentially two ways that a business can qualify for the ERTC in 2020 and 2021. While a business can be eligible if it meets either the revenue reduction requirement or is subject to a government shutdown, there is extensive controversy around the application of the latter, as it requires a thorough review. Unfortunately, some providers have taken an aggressive approach to claim this benefit, putting companies at potential risk.
Be wary of aggressive claims that could be risky
Some consultants are promoting an overly aggressive narrative that every business can qualify for ERTC. That’s not true. While government orders may have impacted many businesses, qualifying any company requires careful consideration and review on a case-by-case basis. Business owners who are approached by consultants claiming that a whole industry qualifies for ERTC should be wary. For example, auto dealerships have been identified as one such industry, and business owners in that vertical should consider the risks.
The existing rules indicate that if more than a nominal interest of a business was impacted by government order, then that business is able to take the credit on employees paid during the time or impact of the order. There are many variables that can impact this determination, such as whether the business is a member of an affiliated group, the duration of the impact, and the alternative mitigation strategies available to the business, to name just a few.
How can businesses mitigate risk when applying for ERTC?
- Ensure the consultant takes the time to review the impact of any shutdown on the business due to a government order before determining whether the business qualifies. An “approval” before a thorough review should be a red flag.
- The ERTC consultant should provide clear and quantifiable substantiation of the qualification criteria before asserting that the business is eligible.
- The consultant should offer a contract to sign for the work to prove their credibility and accuracy of the results.
- The consultant should follow all available guidance. While there is not a lot of guidance on the subject yet, there is some available. Any credible consultant will only stake claims based upon the regulations provided to uphold the letter of the law.
- Before signing a contract for ERTC assistance, businesses should consult with their CPA. A certified public accountant is a trusted advisor who will ensure there are no unforeseen penalties or interest incurred due to aggressive interpretations or positions to qualify an otherwise ineligible business.
